Sunday, June 23, 2024
Money TalksShortages of inputs, customs burden leave water bottlers thirsty

Shortages of inputs, customs burden leave water bottlers thirsty

Ethiopia is a country full of mysteries. It may not be surprising to see imported oranges or even spices in one of Addis Ababa’s supermarkets, although the country is endowed with natural resources and an arable land that can feed not only its people but also neighboring states. This is not going to be any different in case of the water sector, where it is hard to find who always has access to potable water.

Even in urban areas where the coverage of water is believed to be almost 100 percent, getting clean water is almost impossible. While low-income households take the risk of consuming the water despite knowing the health risk it poses, middle-income households and those in the upper bracket prefer the packaged water.

It appears this will also be a history if the problems that are dragging back the packaging water industry remain unsolved and packaged water might even be out of reach for those under the middle-income bracket.

While the retail price of packaged water saw a 40 percent spike in less than a year, 2022 alone saw the closure of almost two dozens of water packaging industries, forcing over 3,000 people into unemployment. The existing 134 water bottlers are also on the verge of closure, according to their lobby group, due to shortage of inputs, a problem not unusual to the manufacturing industry in Ethiopia.

Fikir Water is among the companies being challenged to continue its operations.

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“We are now utilizing only 40 percent of our capacity. If things continue as they are now, we will be forced to suspend operations and lay-off our employees,” said Biniam Zeleke, general manager of Fikir Water, a company established in 2014 in Guraghe Zone.

This is a major setback for a company that increased its production capacity to package by 50 percent, to 36,000 bottles of water every hour, four years after its establishment. The problems faced by Fikir and other water bottling companies throughout the country did not come out of the blue.

No segment of the manufacturing industry grew as fast as the water bottling business in Ethiopia. Factories packaging water spread like wildfire in each region and towns in the last decade. A major contributor of tax revenue for regional states across the country, the factories also played a big role for the growth in consumption of packaged water.

Their increase in number and customer’s dissatisfaction with tap water led to a spike in demand for packaged water, encouraging customers to start consuming the product. But this only addressed the industry’s demand-side problems which it faced since the time of Highland, the first bottled water in Ethiopia.

Until COVID-19 forced economies and businesses to partially or fully close, demand was growing at a fast pace and its growth continued after the economic challenges brought by the pandemic started to dissipate. But the supply-side problems remained unsolved.

Polyethylene Terephthalate (PET), an essential component of bottled water, is a major input bottling company’s usually struggle to get. Studies indicate USD 20 million is needed to import enough amounts of PETs for water bottling companies. With market opportunity for the product growing, the figure is expected to reach nearly USD 100 million in the next decade.

Even though there has been an attempt to substitute the product locally, demand has not been met yet and importers are taking advantage of the problem, according to the Ethiopian Water, Soft Drinks, Vegetable and Fruit Producers Association.

“The price charged by importers is increasing day after day and it is now becoming out of control. In fact, that is the major factor for the closure of two dozens of factories and the laying off thousands of employees,” said Ashenafi Merid, the president of the Association.

Yet that is not the only problem faced by industry players. While their attempt to persuade officials at the National Bank of Ethiopia (NBE) to stop allocating forex for importers and divert the currency to themselves, is yet to bear fruit, the higher tariff levied by custom officials on PET is another challenge that has led to a surge in production cost, which is now reflected on the price of the end product.

“Since many importers were deceiving by undervaluing the price of PET, custom officials think we do the same. For instance, we import PET for USD two per kilo but we are being told the price is USD six, which is being used as a reference to estimate the tax we should pay. This will kill the sector and must stop,” Ashenafi added.

Industry players also want to see the end of customs burden.

“We should not be treated as an importer. We are importing critical inputs and the valuation of our product requires a revision,” said Biniyam.

Officials of the Custom Commission, however, accuse producers of understating the real value of the input they import.

“There are importers and producers that claim they have imported a ton of PET for USD five per ton, while the actual price is USD 1,000 per ton. With such gaps becoming common, we use the valuation of the World Trade Organization and make adjustments in real time, with the latest being in February, when the prices of petroleum begun to spike,”  said Addis Ayele, Director of Market Research and Price Valuation at the Commission.

The Commission is not the only institution where water bottling companies demanded a change.

“We also want the Ministry of Finance to reconsider the excise tax levied two years ago, when it considered packaged water as a luxury good,” said Ashenafi, as he demands the 10 percent excise tax his industry faces to be lifted, a request that failed to materialize for over a year.

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